Exam 21: Managing Liquidity Risk on the Balance Sheet

We rarely see bank runs since the advent of Federal Deposit Insurance,but runs on life insurers and mutual funds do occur even though claimants have pro rata claims in the event of default. Why do these runs still occur?

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Question 1

Correct Answer:

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Life insurers: State guarantee funds,if they exist,do not guarantee timely payment to policyholders. Rational policyholders would seek to cash out first (while they can still receive the full surrender value of the policy)rather than face an uncertain payout received at an uncertain time in the future. Mutual funds: Runs on mutual funds do not occur because of fear of default. Runs occur in periods of falling asset values when MF investors seek to cash out prior to facing large losses on the value of their fund holdings. Redemptions can deplete the fund's cash reserves and force the fund to sell assets at depressed prices.

Contagion effect occurs when a failure of one DI leads to concerns among depositors about the solvency risk of the other DIs.

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(True/False)

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Question 2

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True

Discount window borrowing is available to I. banks. II. thrifts. III. investment banks. IV. nonfinancial corporations.

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Question 3

Correct Answer:

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Life insurers and property and casualty insurers have federal guarantee programs similar to DIs deposit insurance.

(True/False)

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Question 4

When investment funds experience dramatic liquidity needs,the liquidated assets are distributed to fund's shareholders on first-come,first-served basis.

(True/False)

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Question 5

If FNBNA is expecting a $20 million net deposit drain and the bank wishes to fund the drain by borrowing more money,how much will pretax net income change if the borrowing cost is the same as on its existing borrowed funds?

(Multiple Choice)

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Question 6

Which of the following results in a net liquidity drain?

(Multiple Choice)

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Question 7

A bank has $6 million in Treasury bills,$3 million in excess reserves at the Fed,$1 million in vault cash,and an $8 million line of credit on the repo market. The bank has borrowed $6 million in Fed funds and $12 million in short-term notes borrowed to finance loans. What is the net liquidity position of the bank and what can you conclude from it?

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Question 8

When money market interest rates are higher than deposit rates,using purchased liquidity to replace deposit drains can reduce a bank's profit margin.

(True/False)

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Question 9

Property and casualty insurers have a greater need for liquidity than life insurers.

(True/False)

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Question 10

In the absence of deposit insurance,a deposit is a ________ to the bank's assets.

(Multiple Choice)

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Question 11

If FNBNA is expecting a $10 million net deposit drain and the securities liquidity index is 0.97,by how much will pretax net income change if the drain is funded entirely through securities sales?

(Multiple Choice)

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Question 12

What is Second National Bank's total net liquidity?

(Multiple Choice)

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Question 13

Insurance industry guarantee funds do not eliminate runs on insurers because I. the funds are not backed by the federal government. II. the funds lack permanent reserves to back policies. III. the size of the required contributions differs widely from state to state.

(Multiple Choice)

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Question 14

Relying on purchased liquidity is more risky than relying on stored liquidity.

(True/False)

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Question 15

A married couple each has an IRA and deposits at a bank. The couple also has one child. If they had the money,what is the total amount of their accounts that could be insured at one bank?

(Multiple Choice)

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Question 16

If FNBNA is expecting a $15 million net deposit drain and the securities liquidity index is 0.98,how many securities would have to be liquidated if the bank used only its securities to fund the expected deposit drain?

(Multiple Choice)

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Question 17

If a bank meets a net deposit drain by borrowing money in the Fed funds market,it is using purchased liquidity.

(True/False)

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Question 18

The fear that liquidity problems at one bank may cause depositors to worry about the solvency of other banks is called the disease effect.

(True/False)

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Question 19

What are Second National Bank's total sources of liquidity?

(Multiple Choice)

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Question 20

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Exam 21: Managing Liquidity Risk on the Balance Sheet

We rarely see bank runs since the advent of Federal Deposit Insurance,but runs on life insurers and mutual funds do occur even though claimants have pro rata claims in the event of default. Why do these runs still occur?

Contagion effect occurs when a failure of one DI leads to concerns among depositors about the solvency risk of the other DIs.

Discount window borrowing is available to I. banks. II. thrifts. III. investment banks. IV. nonfinancial corporations.

Life insurers and property and casualty insurers have federal guarantee programs similar to DIs deposit insurance.

When investment funds experience dramatic liquidity needs,the liquidated assets are distributed to fund's shareholders on first-come,first-served basis.

If FNBNA is expecting a $20 million net deposit drain and the bank wishes to fund the drain by borrowing more money,how much will pretax net income change if the borrowing cost is the same as on its existing borrowed funds?

Which of the following results in a net liquidity drain?

When money market interest rates are higher than deposit rates,using purchased liquidity to replace deposit drains can reduce a bank's profit margin.

Property and casualty insurers have a greater need for liquidity than life insurers.

In the absence of deposit insurance,a deposit is a ________ to the bank's assets.

If FNBNA is expecting a $10 million net deposit drain and the securities liquidity index is 0.97,by how much will pretax net income change if the drain is funded entirely through securities sales?

What is Second National Bank's total net liquidity?

Insurance industry guarantee funds do not eliminate runs on insurers because I. the funds are not backed by the federal government. II. the funds lack permanent reserves to back policies. III. the size of the required contributions differs widely from state to state.

Relying on purchased liquidity is more risky than relying on stored liquidity.

A married couple each has an IRA and deposits at a bank. The couple also has one child. If they had the money,what is the total amount of their accounts that could be insured at one bank?

If FNBNA is expecting a $15 million net deposit drain and the securities liquidity index is 0.98,how many securities would have to be liquidated if the bank used only its securities to fund the expected deposit drain?

If a bank meets a net deposit drain by borrowing money in the Fed funds market,it is using purchased liquidity.

The fear that liquidity problems at one bank may cause depositors to worry about the solvency of other banks is called the disease effect.

What are Second National Bank's total sources of liquidity?

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

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